PRIMARY MARKETS

ISSUE OF CAPITAL AND DISCLOSURE

REQUIREMENTS REGULATIONS

Dr. Pradiptarathi Panda

Assistant Professor, NISM

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AGENDA
➢Primary Market Overview
➢IPO Process
➢Key Parties Involved
➢Conditions for Public Issues
➢IPO in SME exchange

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WHAT ARE SECURITIES ?
✓SCRA provides an inclusive definition of ‘securities’. It says that ‘securities’ include
shares, bonds, debentures, units of MF, units of CIS, etc. It does not define in terms
of ingredients an instrument must have to be considered as ‘securities’.

✓It is precisely because ‘securities’ are most insecure instruments. If it is a market for
such insecure instruments, market would collapse if some body does not regulate
away the insecurities.

✓A security is a fungible financial instrument that represents some type of

financial value. The company or entity that issues the security is known as the
issuer.

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INDIAN SECURITIES MARKET

The Indian securities market dates to the eighteenth century, when the
securities of the East India Company were traded in Mumbai and Kolkata.
The orderly growth of the capital market began with the setting up of the
Bombay Stock Exchange in July 1875 and Ahmedabad Stock Exchange in
1894.
But real development of Indian Capital Market started after statutory status
to SEBI in 1992.

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 NATIVE SHARES AND STOCK BROKERS ASSOCIATION

➢Would trade on steps of many banks and insurance companies

➢Would be shooed away by people because of noise they created
➢Started sitting a banyan tree
➢Bombay Stock Exchange was recognized in May 1927, under Bombay
Securities Contract Act, 1925

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BANYAN TREE –BSE(1875)

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 SIGNIFICANCE OF SECURITIES
MARKETS
✓A high rate of economic growth in any economy is contingent upon availability of
adequate capital.
✓It disintermediates and reduces cost of capital for issuers and provide higher return for
savers.
✓It diffuses stress on the banking sector by diversifying credit risk across the economy.
✓It provides market-based sources of funds for meeting government’s financing
requirements.
✓It provides products with flexibility to meet the specific needs of investors and borrowers.
✓It raises the productivity of investment by improving allocation of investible funds

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 SIGNIFICANCE OF SECURITIES
MARKETS
✓Supplying funds for long-term investment needs of the corporate sector.
✓Serves as an ‘engine’ of financial development and innovation.

➢The securities market also provides transferability of securities, very basis for the joint
stock enterprise system.

➢Securities markets enhances Liquidity. In the words of Professor Ross Levine : “Investors
will come if they can leave”.

➢The securities market makes it possible to satisfy simultaneously the needs of the
enterprises for capital and of investors for liquidity.

➢More liquidity and higher potential yield on security encourages people to make
additional savings out of current income.

➢It increases net capital inflow from abroad.

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 BANK VS. SECURITIES MARKET
➢Intermediation vs. Disintermediation
➢Cost of Capital
➢Risk & Return
➢Transparency
➢Banks are generally risk averse because of very nature of their deposits.
➢The securities markets score over banks in the allocational efficiency and thus reduces cost
of capital.
➢This risk aversion results in many economically productive and high-value added projects
not being financed. The failure to fund such efforts can greatly hamper economic growth.

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HTTPS://WWW.YOUTUBE.COM/WATCH?V=ODKIJCRW
VRQ

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 1992
1875

1988 & 1992

2008

PRIMARY MARKETS IN INDIA

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 PRIMARY MARKET
➢Market in which shares, debentures and other securities are sold for the
first time for collecting long-term capital

➢Usually known as “Initial Public Offer” (IPO) Market

➢Flow of funds is from savers to users/ borrowers

➢Helps in capital formation

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 Types of Issues

✓ Public issue: Securities are issued to the members of the public, and anyone eligible to invest
can participate in the issue. This is primarily a retail issue of securities.
✓ Private placement: Securities are issued to a select set of institutional investors, who can bid
and purchase the securities on offer. This is primarily a wholesale issue of securities to
institutional investors.
✓ Preferential issue: Securities are issued to an identified set of investors, on preferential
terms, along with or independent of a public issue or private placement. This may include
promoters, strategic investors, employees and such specified preferential groups. d.
✓ Rights and bonus issues: Securities are issued to existing investors as on a specific cut‐off
date, enabling them to buy more securities at a specific price (rights) or get an allotment of
additional shares without any consideration (bonus).

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 FUND RAISING AT VARIOUS LIFECYCLE STAGES
Investors and Instruments issued depend on the option and stage of lifecycle
Depository
Foreign Receipts with
Shares
Currency the underlying
Bond being Shares
Strategic
DRs with convertible Investment
underlying into Shares
being ADR Customer,
Shares Supplier,
FCCB Competitor
Shares / Shares US QIB
PCD / FCD GDR
Hedge Funds, FPIs
QIP
Shares Rights FPIs
Shares /
Warrants / Follow-on Issue QIBs
FCD / PCD Public Issue Existing Shareholders

Private FPIs, FI, Banks, Insurance Cos, MF,

Shares Placement HNI, Individuals including NR

Shares IPO Promoters, Fis, Strategic

Warrants / Investor
Shares Private FPIs, FI, Banks, Insurance Cos, IPO: Initial Public Offer
Equity MF, HNI, Individuals QIP: Qualified Institutions Placement
Shares Venture GDR: Global Depository Receipts
PE Funds including NR
Capital FCCB: Foreign Currency Convertible Bond
Seed ADR: American Depository Receipts
Venture Capitalist
Capital FCD: Fully Convertible Debentures
PCD: Partially Convertible Debentures
Own funds, Family, QIP: Qualified Institutional Placement
Friends, Angel Investors QIB: Qualified Institutional Buyers

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OPTIONS FOR RAISING FUNDS
Various types of instruments

Debt Equity Hybrid

From Banks & FIs IPOs Various forms of

FPOs Convertibles
In India Public issue of
Rights Issue
Bonds/Debentures
Pref. Issue

Outside India ECBs ADR/GDRs FCCBs & FCEBs

ECB: External Commercial Borrowing

ADR/ GDR: American/ Global Depository Receipts
FCCB: Foreign Currency Convertible Bonds
FCEB: Foreign Currency Exchangeable Bonds
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 PRIMARY MARKET- FACTS
Resources Mobilised from the Primary Market
(Source : SEBI Handbook 2019-20) (Includes IPOs, FPOs, Bonds and Rights issues)
Resources Mobilised from the Primary Market (₹ crore)
Period Total
No. Amt
2010-11 91 67608.52
2011-12 71 48467.56
2012-13 69 32454.80
2013-14 90 55651.76
2014-15 88 19202.24
2015-16 108 58165.78
2016-17 134 62067.00
2017-18 231 110269.33
Apr 17-Dec 17 160 73138.45
Apr 18-Dec 18 124 44355.30
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 FUND RAISING STATISTICS THROUGH EQUITY
ISSUANCES
2016-17 2017-18 2018-19
Type of
Amount Amount Amount
Issuance No. No. No.
(₹ in Crores) (₹ in Crores) (₹ in Crores)

Public 106 29087 202 83696 123 16087

Rights 13 3720 21 21400 10 2149
Sub - Total 119 32807 223 105096 133 18236
QIP 20 8464 54 71033 14 8678
Pref. 410 44249 407 59472 399 210138
Sub - Total 430 52713 461 130505 413 218816

Grand Total 549 85520 684 235601 546 237052

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 WHY IPO?
For Funding Needs
➢Capital Requirements for Organic Growth, expansion,
diversification
➢Inorganic Growth through Acquisitions, participate in JV,
Collaboration
➢Infrastructure Requirements, Marketing Initiatives and Distribution
Channels
➢Working Capital Requirements, General Corporate Purposes
➢Repaying debt to strengthen the Balance Sheet
➢Meeting Issue Expenses
For Non-funding Needs
➢Enhancing Corporate Stature and visibility
➢Retention and incentive for Employees through stock options
➢Providing exit options to Investors
➢Providing liquidity to the shareholders
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REGULATORY FRAMEWORK
• Companies Act, 2013 provides framework for
Ministry of
Corporate Affairs public limited companies to raise capital from
public

OBLIGATIONS TO BE FULFILLED BY THE ISSUER COMPANY

• SEBI (Issue of Capital and Discloser
Securities and Requirement-ICDR) Regulations, 2018 – initial
Exchange Board of
India disclosures
• SEBI (LODR) Regulations, 2015 – continuous
disclosures

Ministry of Finance • SCRA, 1956 and SC(R)R, 1957 prescribe

requirements for listing and minimum dilution

• Approvals under FEMA,1999 for transfer of shares

Reserve Bank of
India from non-residents to residents.

• Sector specific regulatory approvals may be

Other Sectoral
Regulators required – insurance, telecom, media, etc.

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 BROAD CONSTITUENTS OF THE INDIAN
SECURITIES MARKET

➢Regulators – SEBI, RBI, IRDA, Stock Exchanges

➢Issuers - Public companies, Private companies and Government
➢Investors - Institutional investors (Foreign and Domestic), HNIs,
Corporates and Retail Investors
➢Intermediaries - Investment Bankers, Legal Counsels, Brokers,
Registrar,, Auditor,
➢Other organisations - Collection Banks, Depositories

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 3 IS
Issuers Intermediaries & Investors
Participants

Unlisted Merchant Bankers Retail Investors

Companies  Syndicate Non-institutional
Listed Companies members Investors
Underwriters QIBs
R&T agents

Depositories

Exchanges

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 THE ISSUERS
❑ Private companies, public companies and governments need
funding at various stages of their lifecycle
❑A number of strategic considerations play a key role in arriving at
the decision for a fund raise:
WHY EQUITY FUND RAISING
➢Capital for business growth
➢De-leveraging
➢Exit for financial investors
➢Currency for acquisition
➢Valuation benchmark
➢Employee incentivisation

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THE INVESTORS

BROAD CLASSIFICATION AS PER SEBI (ICDR) REGULATIONS

QIB Mutual Funds, Banks, Pension Funds, FPIs, Insurance

Companies

RETAIL Individual investors investing upto Rs. 2 lakhs

NII/HNI Investors other than QIBs and Retail Investors

Others Eligible employees, eligible shareholders in case of

reservation in IPOs
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 FACE VALUE
PREMIUM
DISCOUNT

Face Value Premium and Discount

➢Nominal or stated amount assigned to ➢Securities normally issued at face value
a security by issuer of Rs 10
➢Printed on the share / debt certificate ➢Issue at face value other than Rs.10
permitted if the issue price is above
Rs.500/-
➢Issued at Premium – when sold above
face value
➢Issued at Discount – When sold below
face value

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Issue Process- Public Issues
Importance of Prospectus

 Basis of subscription

 Stringent norms for disclosures

 Issuer and Merchant Banker responsible for adequacy and

veracity of disclosures

 Liable to be punished for lapses

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IPO PROCESS – BOOK BUILDING ISSUE
Decision to go for Funds transferred to
IPO issuer

Appoint BRLM, legal

Listing
counsel, other entities

Issuer RoC filing of final

Due diligence
Prospectus

Drafting of the Pricing &

Draft Red Herring Allocation

Filing with SEBI & SEBI Observations

Pre-Marketing & ROC Filing Road shows Book building
Stock Exchanges
Preparation / Approvals Marketing and Estimation of Price Range Launch & Completion

BRLM: Book Running Lead Manager

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 CONDITIONS- PUBLIC & RIGHTS ISSUES
General Conditions
➢Promoter/ Group/ Directors not debarred; not on wilful defaulters list, should
not be a Fugitive economic offender
➢Promoter/ Director not to be Promoter/ Director of a debarred entity
➢Existing partly paid-up shares to be fully paid-up or forfeited
Issue related Procedural requirements
➢Appointment of intermediaries
➢Submission of Draft Red Hiring Prospectus (DRHP) - made public for 21 days
➢Min subscription of 90% through OD
➢Monitoring agency, if issue size >= INR 100 cr
➢Allotments/Refunds within 15 days
Public Issue requirements
➢Eligibility norms; Pricing norms
➢Promoters’ contribution; Lock-in requirements
➢Reservations; Allocation in Net Offer to Public
➢Stabilization mechanisms

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 ELIGIBILITY CRITERIA FOR UNLISTED ENTITIES
(2) Average pre-tax
Option I operating profit of
(1) Net tangible (3) Net worth of at least
Net tangible INR 15 cr on a INR 1 cr in each of the
assets of at least INR
assets, restated & preceding 3 full years
3 cr in the preceding
profitability + consolidated basis, +
3 full years, not (4) Name change & 50%
and net during the 3 most
more than 50% to be revenue from business as
worth track profitable years out
monetary assets per new name
record of immediately
preceding 5 years

Option II Issue through book

No net building route with
tangible at least 75% allotted
assets or to QIBs
profitability
or net worth
track record Allocation in Net Offer to Public
➢ Allotment for all, except Anchor investors, on proportionate basis
➢ Anchor Investors, if allotted, to be discretionary; to be done 1 day prior to issue opening. Excess paid
will not be refunded. Any amount paid less than other investors needs to be paid up
➢ Under subscription in any category can be met by spill over from any other category, with the
exception of mandatory limits where a minimum for a category has been specified
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ALLOCATION IN NET OFFER TO PUBLIC
Option I Option II

Book Building route Other than Book Building Book Building route

RIIs NIIs RIIs NIIs

>=35% >=15% RIIs Remaining <=10% <=15%
to other
>=50% applicants
QIBs<=50% QIBs>=75%
5% to MFs; 5% to MFs

RIIs=Retail Individual investors

NIIs=Non Institutional Investors
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QIBs=Qualified Institutional Buyers
 PRICING OF ISSUES

➢Free pricing of equity shares in an IPO

➢Differential pricing permissible in public issues to retail individual
investors/shareholders – maximum discount of 10%
➢Price Band: Cap(max) price can be 20% more than the floor(min)
price. Price band can be revised by 20% from floor price.

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DISCLOSURES IN OFFER DOCUMENTS
Risk Factors

•Internal: arising out of litigations, specific aspects of business, technology, patents, etc
•External: general business environment, global and domestic economy, etc

Capital Structure

•Shareholding (pre & post), build-up of promoter/ group holding

Objects of the issue

•Disclose of each head for application of funds; interim use of funds

•GCP not to exceed 25% of issue size; means of finance 75% tied-up

Business

•Description of Industry, Business, products/ services of the entity

Management

•Board of directors, committees, details of key managerial personnel

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DISCLOSURES IN OFFER DOCUMENTS

History & Other Corporate Matters

•Shareholder agreements – special rights if any such as tag-along, drag along,

appointment of directors, affirmative rights (vote only positive), etc

Financial Statements

•Auditors Report restated financials (stand-alone and consolidated basis) for 5 years,
Not older than 6 months; Must be in Indian GAAP; Detailed MD&A on past
performance; Documents filed after April 01, 2017 to have disclosures as per IND-AS

Outstanding Litigations

•Pending litigations involving Company/ Promoters / Group / Directors / Group

companies: Criminal Proceedings; Actions by Regulatory authorities; Other material
litigations (as per disclosed materiality threshold); Outstanding dues to creditors

Terms of Issue

•Procedural details on how to apply; detailed instructions on filling up the application

form; description of the book building process, Do’s and Don’ts, flow chart of timelines;

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CONTINUOUS DISCLOSURES
Disclosures under Listing Regulations (LODR-2015)
➢Disclosure of material price sensitive information
➢Financial Results to exchanges and in newspapers
➢Quarterly Disclosure of Share holding pattern
➢Norms related to Name change, promoter reclassification, etc
➢Compliance Certificate on Corporate Governance by Listed
Companies
Disclosures under Takeover code (Substantial Acquisition of
Shares and Takeovers-SAST)
➢Acquisitions, sale of holdings, offers (price, offeror,
restructuring etc)
➢Disclosures under Insider Trading Regulations
➢Acquisition/ sale/ pledge of shares by promoters

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 MAJOR REFORMS IN PRIMARY MARKET

Circuit
Filters, Trade
to Trade
Mandatory ASBA norms
for QIBs, NIIs,
Price info. By MB
T+12 Listing
SEBI (ICDR)

ASBA
IPO Grading,
Corp Gov
DIP Guidelines
Book Building
Repeal of the
CCI

1992 1995 2000 2007 2008 2009 2010 2011 2012

Controller of Capital Issues (CCI)
Disclosure and investors protection (DIP)
Applications Supported by Blocked Amount (ASBA)

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MAJOR REFORMS IN LAST YEAR

▪ New ICDR Regulations, 2018

▪ Introduction of UPI as a new payment mechanism in
ASBA and reduction in listing timelines
▪ Review of Institutional Trading Platform
▪ In pipeline - Reduction of Listing timelines from T+6 to
T+3

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 GREEN SHOE OPTION
➢The Green Shoe Option (GSO) in a public offer is used by companies to
provide stability to price of the share in the secondary market immediately on
listing.
➢A company, which opts for Green Shoe option can allot additional shares not
exceeding 15% of the issue size, to the general public who have subscribed to
the issue.
➢The proceeds from this additional allotment will be kept in a separate bank
account and used to buy shares in the secondary markets once the shares are
listed, in case the price falls below the issue price.
➢This is expected to provide support to the price of the shares. This price
stabilization activity will be done by an entity appointed for this purpose.
➢Usually, the lead manager of the issue will be assigned the responsibility.
➢The intervention in the secondary market will be done only for a period of 30
days from the day of listing.

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SME- EXCHANGE OF INDIA
BSE-SME EXCHANGE
NSE EMERGE

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Lifecycle of SME

Valley of
Less risky
Death

Very risky

Pre seed Seed/Start up Early growth Expansion

Funding Options
Angel Investors Angel Investors Venture Cap IPO
Govt. Grants Govt. Grants PE Debt
Bank Credits Bank Credits IPO PE
Personal Finances Venture Cap Partnership

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SME Listing Background…

The move
aims at As per
providing an estimate of
opportunity SME
to SME
Chamber of
entrepreneur
s to raise
India, over
growth 5000 SMEs
capital and have the
reap potential
BSE and NSE benefits of for listing
listed space Both BSE &
launched
NSE
their A
leverage
respective facilitative
their existing
platform for
SMEs; MCX
‘equity framework
platform’ for for SME
too is
SME listing
gearing up
exchange
for SME
platform
Exchange

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 SME Listing - An Overview of Key
Requirements & Eligibility Norms

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SME Listing - Key Requirements & Eligibility Norms
Capital threshold for Listing

Post Issue Face Value Capital

SEBI Main board
25 Crores Offer doc not
BSE SME/Main Board subject to SEBI
vetting
10 Crores
NSE
SME Exchange

Particulars Requirement
Minimum application
INR 1 Lac
amount / trading lot

Underwriting
100% Mandatory Refer for
(of which 15% to be done by MB in his own account) key norms
Market making (to be of SEBI
Through Exchange-registered market makers for min 3 years
undertaken by MB) ICDR
Min. 25%
Public Shareholding Min. 50 investors
No post-listing continuous requirement
Provisions for migration to / from Main Board from / to SME Exchange

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SME Listing - Key Requirements & Eligibility Norms

SEBI
Max : INR 25 crore
BSE Min : INR 1 crore Post Issue Capital (FV)

NSE

• Net Tangible Assets : INR 1 crore (as per latest audited

results)
• Net Worth (excl. Rev. Reserve) : INR 1 crore or 3 crore, if
Track Record
no track record
• Track record of distributable profits for at least 2 years
out of preceding 3 completed FYs

➢ Mandatory facilitation of trading in Demat securities

➢ Certificate that no winding petition or reference to
Other Requirement
BIFR
➢ Mandatory corporate website
➢ Promoters to attend to interview with Listing
Advisory Committee
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➢ No change in promoter in preceding 1 year PRIMARY MARKETS IN INDIA 56
SME Listing - Key Requirements & Eligibility Norms

SEBI

Post Issue Capital

BSE
Same as BSE (FV)

NSE

• Track record of at least 3 years

• Positive cash accruals (EBDT) from operations and
Track Record
positive net worth for at least 2 FYs preceding the
application
• In case the above conditions are not fulfilled,
Exchange Authority (MD & Joint MD) to decide

Same as BSE plus additional certification / disclosures on

litigation etc. Other Requirement

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BSE SME vs. Main Board

Parameters Main Board SME Exchange

“SME
Exchange Post – issue paid up
Min INR 10 crore
Min INR 1 crore; Max INR 25
has a capital crore
winning Minimum Allotees in IPO 1000 50
edge over
Main Non Mandatory Mandatory
Board” IPO underwriting (Under 50% compulsory (100% underwritten with MB
subscription to QIB’s) underwriting 15%)

IPO Grading (not mandatory) Not mandatory

Track record Stringent track record norms Relaxed track record norms

Offer Document vetting By SEBI By Exchange

IPO Application Size INR 10000 – INR 15000 Min. INR 1 lac

IPO Time frame 6 months 2 – 3 Months

Reporting Requirements Quarterly Half yearly

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 SME Listing – Coming up in a BIG way…

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 SME EXCHANGE- IPO
Resources Mobilised through SME Platform (Amt. in ₹ crore)
Total
Period
No. of issue Amount (₹crore)
1 2 3
2012-13 24 239
2013-14 37 317
2014-15 39 278
2015-16 50 379
2016-17 79 1,105
2017-18 156 2,361
Apr 17-Dec 17 104 1,389
Apr 18-Dec 18 93 1,580
Total 582 7, 648
Note: The SME platforms at BSE and NSE commenced operations on March
13, 2012.
Source: SEBI
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 THANK YOU
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